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Medicaid spending growth is surprisingly modest

April 25, 2012 at 2:05 pm

multiple authors

This post is coauthored by Austin Frakt and Aaron Carroll.

Christopher Flavelle has put together a fascinating Bloomberg Government Study on the allure and growth of Medicaid managed care and the recent trend in Medicaid spending by states. It’s the first of three pieces in this area and, unfortunately, is behind a paywall. If you can get your hands on it, it’s worth a full read. If you can’t, here are a few details we thought worth highlighting.

Flavelle writes that advocates of turning Medicaid into a block grant program often claim it would “increase spending predictability.” Given this and other rhetoric from states about their “out of control” Medicaid growth, you’d think that spending has been growing exceptionally rapidly recently.

According to analysis by Flavelle, that’s not the case.

Inflation adjusted Medicaid spending per capita by state general funds increased just 3.8% between 2002 and 2011. This is illustrated by the dotted line in the chart below. Per capita Medicaid spending by each of the five states with the largest Medicaid programs is also shown. Though they gyrate up and down, they all end up at the end up in 2011 close to or even below where they started in 2002.

Some might object to dividing spending by the state population (per capita), because the population grows over time.* Of course, the state’s population reflects its potential tax base too, so it is fair to divide by it by that standard. A State with a growing population should to be able to afford commensurate growth in its Medicaid spending, though that can depend on how different sectors of the population grow relative to each other (more wealthy or more poor people).

In any case, total (not per capita) real Medicaid growth was just 12% from 2002 to 2011. That’s not as high as we expected, though there is variation by state. While spending in Illinois actually decreased by 1% over this period, spending in Texas went up 58%. Moreover, this is growth above inflation, so there is room for improvement. Still, Medicaid has held spending growth below that of other payers. Flavelle quotes Vernon Smith, former Medicaid director for Michigan:

“When you look at the rate of growth for all the major payers — Medicaid, Medicare, employer-sponsored insurance, National Health Expenditures — what you see is that no other payer has constrained the rate of growth in spending as well as Medicaid has. [] The reason is that no payer has been as motivated to undertake cost containment as state governments.”

In total, it looks like states have done a pretty good job. Based on spending trends alone, it isn’t clear why officials in some states think the program needs major restructuring. That’s not to say it is perfect or that there aren’t other justifications for reform. Of course there are. In fact, given its low reimbursement rates, some might reasonably argue we should spend more on Medicaid, not less. At any rate, the data don’t support claims that state spending on Medicaid has been growing in an especially concerning way, particularly relative to other payers.

* Another potential objection is that Medicaid spending by state general funds does not count “other funds and revenue sources used as Medicaid match, such as local funds and provider taxes, fees, donations, assessments.” True! However, Flavelle justifies a focus on general fund spending by quoting Alan Simpson who characterized that type of spending as a “tax gimmick” and that states just use “that additional ‘spending’ to increase their federal match.” If you collect a dollar and then give it back to those you collected it from in order to get another dollar (or more) from the federal government (which, of course, you also spend on the same providers you taxed), have you really spent your own funds?

I wasn’t able to get behind the firewall, but I did read the summary and watch the video. While the claim was made that state general fund spending in Medicaid had moderated, there was no mention of the impact of ARRA, which from 2009 through June 2011 dramatically increased the Federal Matching Assistance Percentage (FMAP), the portion of Medicaid paid for by the Federal government, and greatly eased the state general fund burden. For example, in California, the FMAP rose from 50% to just under 62%, meaning that with a Medicaid budget approaching $50, California was able to shift 12% of expenditures, roughly $5 billion dollars, back to the Feds. I’m not sure any credible argument can be made that state general fund spending for Medicaid actually moderated without adjusting the numbers to account for the impact of ARRA.

I’m not so sure that the results reported here are particularly encouraging. Remember that paper by Chapin White from a few weeks ago? He found that overall Medicaid use remained constant, even when coverage was expanded. Another way to think about this is that when more people are included in the system, the per capita use goes down proportionately. So a simple model to explain these results is that states simply limit the total amount of services allocated to Medicaid, and then patients compete among themselves for these limited resources. This is basically Malthusian economics.

Looking once again at the literature regarding the increase in the Federal Matching Assistance Percentage (FMAP), under the American Recovery and Reinvestment Act of 2009 (“ARRA”), reveals a striking differences in how Medicaid was viewed by the 2009-10 Democratic House majority and the 2010-11 Republican House majority. The Democrats who voted to increase the FMAP, deliberately sought to protect the States from having to make harmful cuts to either Medicaid enrollment or services, as result of decreased state revenues due to the sharp recession. Additionally the Democratic majority viewed Medicaid spending itself as another conduit for fiscal stimulus, one with a high multiplier. Cushioning the economy from an even deeper recession was an additional impetus for providing additional Federal assistance for Medicaid.

For the new Republican majority that let the FMAP increase expire in 2011, the impact of the recession on state tax revenues was completely discarded as an explanation for the renewed fiscal pressure on state Medicaid programs. The new explanation for the states’ fiscal bind is that the requirement to cover mandatory populations and provide mandatory services under Title XIX of the Social Security act is itself the source of fiscal pressure. These pressures, the Republicans assert, can only be eased if the states are provided the freedom to cast off Title XIX’s constraining requirements under a new Block Grant arrangement.

Between 2011 and 2019, state own source Medicaid spending per resident is projected to more than double under ACA (i.e., even accounting for the more generous federal match).

States that refuse this deal will be left out in the cold: without federal matching funds, state general funding Medicaid spending would have to increase on average by nearly 400% in order to maintain total Medicaid spending at the same levels. The federal government clearly is relying on this constitutionally questionable coercive lever to get all states to do its bidding under the ACA.

Admittedly, these are not inflation-adjusted figures, but I feel reasonably certain that inflation during this period will be nowhere close to 95%. In short, real expenditures will be dramatically higher than they are today, likely forcing states to reduce their spending on education, law enforcement and other priorities. States have ample reason to escape the increasingly restrictive web of federal Medicaid rules through the freedom offered under block grants.

Chris – Are you making a case for federalizing Medicaid, or do you just want the states to have the freedom to disenroll millions of people and thereby swell the ranks of the uninsured, who will then be seeking uncompensated care in hospital emergency departments?

Federalizing Medicaid would be a huge mistake, IMHO. Uncle Sam’s unfunded entitlement liabilities already are unsustainable, so we have no business adding to these so long as we have failed to figure out a sustainable way of financing our existing commitments.

Austin and Aaron seemed to be questioning the rationale for moving in the direction of block grants. I was merely pointing out that past isn’t prologue. The freight train of larger Medicaid obligations headed towards the states is sizable enough to warrant giving them more flexibility to deal with them rather than tying their hands even further.

One of the chief flaws of the ACA was expanding by nearly one third the enrollments in a Medicaid system that already was badly in need of reform. Instead of fixing those problems, the ACA will simply shovel more people into the same system while everyone prays that it doesn’t break entirely. As you well know, ER usage is HIGHER among Medicaid enrollees than among the uninsured at all age levels http://www.cdc.gov/nchs/data/databriefs/db38.htm reflecting the severe problems of access faced by those with Medicaid cards: many can’t find providers willing to take them. Thus, there is ample room to find more humane alternatives to fee-for-service Medicaid, whether it be managed care, greater reliance on medical homes or private health plans/systems capable of specializing in chronic diseases and that might offer far greater continuity of care than the current Medicaid system does.

Chris, do you believe that most states would use the alternatives you mention if Medicaid became a block grant that rose more slowly than health care inflation rather than simply cutting enrollment or services?

Consider the actions of Arizona under Governor Jan Brewer. Her administration dropped Medicaid coveage for thousands of low income deemed “optional” under Title XIX. Arizona it should be noted, is a state in which a very high percentage of the Medicaid population were already moved into the managed care model a long time ago. But it’s not a partisan issue. Even Jerry Brown of California has begged the Obama admministration for the freedom to drop or limit services, lower reimbursement rates and require people with meager incomes to make substantial copayments that are now prohibited under Federal law.

Giving States operating under severely constrained budgets the freedom to manage thier Medicaid programs without any external guidelines or restrictions actually results in the worst type of government run health care imaginable – one where services actually are rationed, providers actually are forced to work for meager compensation, and public health policies actually are made by state budget officials rather than state health officials.

I believe states (and families) spend their own resources more prudently than resources provided by third parties. The reality is that a state with a 75% Medicaid matching rate has an incentive to expand its services to the point where each state dollar buys one dollar’s worth of value. So at the margin, that state is using $4 of resources to provide only $1 worth of value. By definition, that’s extraordinarily wasteful. A block grant alters state incentives considerably, since it provides a floor on spending while also encouraging them to deploy those resources in the most efficient manner possible.

States may well cut eligibles or benefits, but that’s their prerogative since every dollar spent on Medicaid is a dollar not available to spend on education, law enforcement and/or is a dollar taken from taxpayers. The real world is full of trade-offs. We can’t pay for everything, so we have to set priorities. For decades, the Medicaid funding formula has wastefully privileged spending on medical care over state spending on other priorities. It’s not for you or me to paternalistically decide what those priorities should be. Competitive federalism ensures that states that get these trade-offs right will, over time, grow and prosper. Those that get it wrong may find its citizens fleeing to its neighbors. More importantly, in a society with heteregenous tastes, those who care more about spending on health care for the poor can locate themselves into more generous states (and thereby subject themselves to the taxes required to support that level of generosity). Others can make different choices.

Which gets to yet another reality: one size doesn’t fit all. Ignoring this reality leads to bad policies (i.e., policies that don’t maximize social welfare).

I certainly would be interested in any evidence you could provide that Medicaid agencies are spending money wastefully after five years of intense budget pressure that has had them combing through their programs with a fine-tooth comb searching for savings. I would also be interested in any literature that supports the proposition that the Federal match encourages extravagance, since the states with the highest Federal match also tend to be the ones with the stingiest eligibility guidelines and benefits.